Securing Mortgages for Self Employed with No Accounts
In line with self-employment trends, demand for mortgages for self-employed without accounts has increased in recent years. Over the last 40 years, the self-employment market has expanded dramatically, doubling from 2 million to over 4 million in 2022. The figure peaked at 5 million people just before the Covid pandemic, although, despite economic challenges, the trend is moving upwards again.
We will now take a look at the challenges faced by those in self-employment, their options and solutions. In what can be a complex situation, it will soon become obvious that it is important to take professional financial advice at the earliest opportunity.
Challenges faced by self-employed individuals without accounts
As more people switch back to self-employment, having briefly transferred to employee status to qualify for furlough payments, this is causing issues with mortgage applications. There are not only new self-employed individuals without accounts, but those switching back from employee to self-employed status with gaps in their self-employed income. When considering the recent economic downturn, securing mortgages for self-employed with no accounts requires specific expertise.
We provide specialist advice to those seeking mortgages where their borrowing requirements may be a little more complex than usual. Consequently, we have seen increased interest in the self-employed arena. However, before we look at the options and solutions for those in this specific area of the market, it is essential to appreciate the broader challenges.
Proof of income
When applying for a self-employed mortgage, the broker/lender will normally require at least two years of accounts on which to base their calculations. This can be in the form of traditional accounts or a tax summary overview from HMRC, which will clarify your declared income. Unfortunately, the situation can be a little more complex for contractors and company directors.
Contractors
While historical income is applicable when calculating mortgage finance limits, self-employed contractors must clarify a firm revenue stream in the future. This may include extending existing contracts, new contracts signed or a mixture of the two.
Company directors
Some company directors are effectively self-employed – employed by their own company – which can create a mix of different income streams. Therefore, it is common to see dividends and/or retained profits used together with a regular income when calculating mortgage funding.
To secure self-employed mortgage finance, you must demonstrate a reliable income stream; it is as simple as that. However, this brings us to the age-old adage of utilising tax breaks and expenses to reduce your income tax liability while looking to maximise your mortgage multiple.
Maximising your income, planning ahead
When considering a property purchase, it is essential you plan ahead and ensure that your regular income supports your mortgage application. In this instance, we will work on an average of 4.5 times self-employment income when applying for finance.
Let’s assume your business is running at full capacity, and you are earning a net income of £50,000 a year. Without additional capital investment in the business, there is little scope for a significant increase in your income. However, a one-off £20,000 investment in equipment has the potential to add an additional £20,000 per annum to your net income.
Scenario one
Unwilling or unable to make any significant investment into the business, you are content with a net income of £50,000 per annum. In this scenario, you could borrow up to £225,000 to fund your property acquisition. While we appreciate there are other factors to consider, this gives you a broad idea of the situation.
Scenario two
Planning for the future, you decide to delay the purchase of a home for two years while focusing on expanding your business. Within 12 months of investing £20,000, your net income from the business has increased to £70,000 per annum. Using the 4.5 multiple, this equates to a potential mortgage of up to £315,000, an increase of £90,000.
Even though we have simplified the two scenarios, this highlights the potential benefits of planning ahead and, in this instance, investing in your business to increase long-term regular income.
Managing your credit score
When applying for a traditional mortgage, it is common practice to make preparations such as maximising your income and managing your credit score. Often, relatively minor tweaks to your budget can make a significant difference to your credit rating. Numerous free services available today will monitor your credit score, allowing you to keep track.
As a self-employed individual, it is essential to maintain a good credit score, as potential suppliers and customers may consider this before engaging with you. Your credit score in business reflects your reputation, credibility and reliability. This also applies to mortgage brokers and lenders considering your application.
Solutions for self-employed individuals without accounts
We have considered the challenges of a traditional mortgage and specific issues with self-employed mortgages; now, it is time to look at practical solutions.
As self-employed mortgages are, on the whole, more complex than traditional mortgages, it is vital to take professional financial advice. We have a team with over 40 years of experience in the mortgage industry, including those specialising in more complex mortgage solutions.
Our independent status allows us to speak and negotiate with many mortgage lenders, including specialists in self-employment finance. Consequently, we understand their criteria, flexibility, and what they require to overcome what, on the surface, may seem insurmountable hurdles.
Some of the more common solutions include:-
Certified financial projections
Many mortgage lenders will take into account business plans/forecasts for the future, traditionally certified by accountants. However, unless your mortgage application includes at least one year of full business accounts, the impact of projections in isolation will be limited. Financial forecasts should be seen as supplementary to business accounts.
Historical income
Some lenders offering mortgages for self-employed with no accounts will consider historical income. For example, this may be regular employee income in the same field before switching to self-employed status. A mortgage application made on this basis will often include additional support, such as signed contracts for the future and a degree of secured income.
Joint mortgage
One of the more straightforward solutions for those facing challenges with a self-employed mortgage is to take out a joint mortgage with a partner who has a regular income. This may be steady employee income or another self-employed individual with multiple-year accounts to show their track record. In effect, the income earned by the joint applicant is used to supplement income from the self-employed individual.
Enhanced deposit
When applying for any mortgage, the amount and the interest rate are all linked to the risk/reward ratio. Therefore, providing an enhanced deposit for your property purchase will reduce the risk and increase your chances of approval. Of course, you will still need to justify your income projections, but this solution offers the lender an enhanced headroom (the difference between the value of the property and your mortgage).
Preparation for your self-employed mortgage application
Whether you are looking towards a standard mortgage or something a little more complex such as a self-employed mortgage, it is essential to prepare beforehand. As a minimum, you should review your finances at least once a year with your financial adviser. However, when it comes to business/self-employed finances, they should be considered and reviewed on a more frequent basis.
There are various ways in which you can prepare, including:-
- Enhance your income
- Identify maximum property budget
- Improve your credit score
- Consider mortgage structure (individual/joint)
- Speak with a specialist mortgage broker
In reality, there are issues outside your control, such as the economy and interest rates; however, monitoring developments in these areas is helpful. Occasionally, this may delay your plans or reduce your target investment to accommodate a potential dip in your earnings. However, you can still prepare for a self-employed mortgage, ensuring you’re ready to move at the right time. In addition, regular communication with your mortgage broker can create a seamless application process, as much of the prep work has already been completed.
Conclusion
The UK mortgage sector is highly competitive, and the growing number of self-employed people has created a very active subsector. We are currently seeing previously self-employed individuals who moved to employee status, to be eligible for the furlough support scheme, transferring back to self-employed. This has created gaps in self-employment income, making an often complex situation even more challenging.
We provide mortgage finance across the entire spectrum but have particular skills in areas where income and finances are a little more complex. As discussed above, preparing as soon as possible for your planned property investment/move is essential, including regular communication with your mortgage broker. This allows us to discuss changes in the marketplace, and your financial situation, and consider the options ahead of your mortgage application.
As a specialist mortgage broker, we have experienced the general mortgage market’s ups and downs, including the changing scenario for the self-employed. So if you are planning a property purchase in the short to medium term or are having trouble securing a self-employed mortgage, call us today to discuss your situation and options in more detail.
Risk warning: Your home may be repossessed if you do not keep up repayments on your mortgage.
Sources:-
https://www.finder.com/uk/self-employed-mortgage-no-proof-of-income-or-accounts
https://www.onlinemoneyadvisor.co.uk/self-employed/without-accounts/
https://www.onlinemortgageadvisor.co.uk/self-employed-mortgages/mortgage-without-accounts/
https://haysto.com/self-employed-mortgage/no-accounts
https://www.moneysupermarket.com/mortgages/self-employed/
https://www.kensingtonmortgages.co.uk/new/residential-range/self-employed-mortgages
